Dow slips Thursday, but recovered from a deep China "cold war" plunge on hopes of a Fed pause; Dow set to open flat on Friday after mixed NFP

The US stock market recovered from a deep China “cold war” plunge Thursday on hopes of a Fed pause after December. Dow tumbled almost -800 points (over -3%) as US-China trade war turns into cold war after the arrest of the Huawei CFO by Canada at the US request for extradition on 1st December, Saturday, the same day of dinner diplomacy between Trump and Xi at G20 in Argentina.

On late Thursday, Dow accelerated more after another report suggested that restrained (subdued) inflation reduces Fed's urgency for quarterly rate-increase pattern from 2019 (as it approaching its mean neutral target of 3.00%).

As per the report: “Fed officials are considering whether to signal a new wait-and-see (watch) mentality after a likely interest-rate increase at their meeting in December, which could slow down the pace of rate increases next year. FOMC officials still think the broad direction of short-term interest rates will be higher in 2019, according to recent interviews and public statements. But as they push up their benchmark, they are becoming less sure how fast they will need to act or how far they will need to go and want to assess how the economy is holding up under moves they’ve already made”.

Talking about growing US-China cold war tensions, the arrest of the Huawei CFO is on the allegation that Huawei violated the US sanctions against Iran by selling telecommunications equipment and actively engaged in suspicious transactions with Iran linked entities through HSBC. There is a report alleging closer ties to between Huawei and a company that sold HP equipment in Iran. As a reminder, Huawei has frequently been the focus of US intelligence for trying to gain access to the 5G network. The company is the world's 2nd-largest maker of telecommunications equipment.

The arrest of Meng, a daughter of the company’s founder, is likely to escalate tensions between the US and China over technology and trade truce issues, just as the two countries appeared to have reached a trade ceasefire.

Now, if the US decides to prosecute Meng further rather than releasing her, the issue could be a serious blow in US-China diplomatic as-well-as trade relation as Huawei is a strategically important tech company for China and Meng is the face of the company, an influential figure in China and also the would be CEO. For Trump, even if he is “sympathetic” for the Chinese cause for greater “national interest” of a trade truce, it will be difficult for him to interfere in the US judicial system.

As Huawei has been widely recognized as one of the most successful technology companies in China, the arrest of its popular CFO may push Chinese leadership into an awkward political position back home. Public opinion in China will likely become more negative with respect to the trade war, and potentially against US companies. The Chinese government may find it difficult to tell the public that they have offered significant concessions to the US.

The US-China trade talk has just been resumed at the G20 meeting, but now the prospect of reaching a trade deal by 1st March’2019 (90-days from 1st Dec’2018) is also looking difficult and the US business interests in China could also face a higher risk than earlier.

Amid all these US-China cold/trade war narrative, subsequent plunge in US stocks and risk-aversion flow to the safety of bonds, the US bond yield tumbled The benchmark 10Y US bond yield plunged below 2.85%, while the 2Y yield also stumbled below 2.70%.

Although, the bond yield spread between 10s and 2s has steepened to around +15 bps from +10 bps a few days ago, the market is now even dialing back the probability of the December rate hike from 80% to below 70%, considering the stock market plunge, recent spate of subdued economic data, specially US core PCE inflation at +1.8% and increasing concern of an economic slowdown as bond yield on the verge of an imminent inversion.

Subsequently, USD doomed, which in turn also helped US stocks to some extent, although it’s now almost certain that the Fed is going to hike on 19th Dec. Overall, rising interest rates/borrowing costs, muted business investment/private capex and ongoing trade tensions with China have sparked fresh worries about an economic slowdown in the coming days and the US stock market is under stress coupled with Trump’s trade/cold war agenda.

The blue-chip Dow Jones Industrial Average (DJ-30) edged down -0.32% (-79.40) and closed around 24947.67 after making a session low-high of 24242.22-24951.01 in a day of wild volatility. The broader S&P 500 (SPX-500) edged down -0.15% (-4.11) to close around 2695.95 and made a session low-high of 2621.53-2696.15 in a day of dramatic volatility. The tech-heavy Nasdaq Composite (IXIC) jumped +0.42% (+29.83) to close around 7188.26 after making a session low-high of 6984.34-7189.52 in a day of rollercoaster trading; Amazon, Netflix and Google parent Alphabet. Microsoft, Cisco, AMD, GE, SIRI helped, while Apple and BAC dragged.

The market is concerned about renewed US-China trade/cold war after the arrest of the CFO of China's Huawei in Canada for possible violation of banking laws as Huawei sought to evade sanctions against Iran by routing a series of transactions through HSBC bank. Markets are concerned that China may retaliate for her arrest by ending trade talks with the US.

Although China has separated the arrest of Huawei’s CFO from trade talks between Beijing and Washington, the US side, led by Bolton is hinting that the case would be a bargaining chip in the broad dialogue between the two countries. The US national security adviser Bolton said tech firms like Huawei will be a major topic in negotiations.

China’s state-run media described Meng’s arrest a “despicable” hooligan act by Washington to contain Huawei’s rise and argued that the arrest in Vancouver – on the same day as US President Trump and his Chinese counterpart Xi dined together in Buenos Aires – had “clearly violated the important consensus the two leaders reached in Argentina”. It said: “We are still not clear whether (the arrest) is a joint action by US administrative and judicial forces or is a result of chaotic policies at various US departments”. It also added that Meng’s case showed China was facing a complicated power play in the US.

Almost at the same time, the US national security adviser Bolton said in an interview that global Chinese tech firms like Huawei would be a “major subject” of discussion between the US and Chinese governments during their trade negotiations, although Bolton did not specify whether Meng’s case would be covered in future talks. Bolton said: “Huawei is one company we’ve been concerned about. There are others as well. I think this is going to be a major subject of the negotiations that President Trump and President Xi Jinping agreed to in Buenos Aires”.

China argued that Meng’s arrest was part of Washington’s plan to seek more from Beijing in trade negotiations; i.e. Huawei is a victim of US-China trade/cold war. The US may use the arrest of Huawei CFO to push China during trade war truce talks.

Meanwhile, China again hailed the Xi-Trump summit, saying the talks had been a great success that produced “exciting” results, which prompted Trump to tweet that he shared Beijing’s optimism about a potential trade deal. Trump said: “Statement from China: ‘The teams of both sides are now having smooth communications and good cooperation with each other. We are full of confidence that an agreement can be reached within the next 90 days.’ I agree!”

But, the market is now awaiting the release of Meng, the Huawei CFO rather than any diplomatic/conciliatory tweet from Trump for a “Santa Rally”.

Technical Outlook: SPX-500

Technically, whatever may be the China trade and yield curve narrative, SPX-500 has to sustain over 2735 for a further rally to 2765/2780*-2800/2815* and 2835/2860-2875/2895 in the near term (under bullish case scenario).

On the flip side, sustaining below 2725-2700/2680 SPX-500 may again fall to 2645/2620*-2600*/2575 and 2535/2495-2445/2385 in the near term (under bear case scenario).

SNP/USD?

US 500

()

SELL

BUY

Please enter your full name

Please enter a valid email address

Please enter a valid country

Please enter a valid phone number

The materials contained on this document are and not made by iFOREX but by an independent third party and should not in any way be construed, either explicitly or implicitly, directly or indirectly, as investment advice, recommendation or suggestion of an investment strategy with respect to a financial instrument, in any manner whatsoever. Any indication of past performance or simulated past performance included in this document is not a reliable indicator of future results.
For the full disclaimer Click here.

Registering to trade with iFOREX is prohibited for %COUNTRYNAME% Citizens.

This service is only available to non %COUNTRYNAME% Citizens.

If you are a National of another Country then you may choose to register under the country of your nationality. By accessing this web site you will be confirming that under the laws and regulations of your local jurisdiction you are permitted to access the materials displayed on this website and to trade through iFOREX.

If you are not permitted to view materials on this web site and/or not permitted to trade through this website or if there is any doubt as to whether you are permitted to trade or not then please exit this website.

Emails that are sent by iFOREX contain important information regarding your trading account. Should you choose not receive emails from iFOREX, you accept and confirm that iFOREX will not be liable for any damage caused, and you will not have any complaint to iFOREX or its employees.
Do you wish to receive emails from iFOREX?

Your selection indicates that you are a resident of a country which this site is not intended for.
You will now be transferred to a site containing content appropriate for residents of the country you have chosen.